Airline Distribution
Dr Keith Mason
Director Business Travel Research Centre
www.businesstravelresearch.com
Dept of Air Transport
[email protected]
Air Transport Management Seminar
Universidade Lusofona
Lisbon
7th - 11th January 2008
Distribution - Factors affecting
distribution strategy
• Airlines drive to reduce costs
•
Distribution has been around 20% of operating costs
• Airlines wishing to have more direct contact with their
clients
• Technology has provided the possibility of a direct channel
between the airline and its customers
• Disintermediation - as airlines doubt the ability of agents to
influence customers’ choice
• GDSs fees
• Large corporates are more professional in the way they
purchase travel products
Star Alliance Carriers collective spend over
USD $11bn on distribution
Description
Total Mainline reservations, sales, advertising and
promotional cost, by category 2004 est.
100%
Advertising &
Promotions
20%
90%
80%
70%
60%
Other
Reservations
& Sales
60%
50%
40%
30%
20%
Cargo
Comm.
1%
10%
0%
Sources: Form 41 4Q03, Star Alliance
Pax
Comm.
19%
Cost
Q3 03
Media
8%
Personnel
2%
Loyalty Programs
2%
Other
7%
CRS / GDS Fees
18%
Credit Card Fees
18%
Salesforce /Reservations
5%
Benefits
6%
Management & staff
3%
Other
8%
Passenger commissions
19%
Cargo commissions
1%
The distribution value
chain
• Airlines spend $5bn per annum on GDS fees
• Cost as % of ticket prices
• GDS
8 - 11%
• Travel Agency 1 - 2%
• Mercantile fee 2 - 3%
Source: UATP(Universal Air Travel Plan), Airline Business July 2005 and July 2006
Airline Distribution
Channels
• Direct
•
•
•
•
Sales offices
Call centres
Website
Corporate travel website
• Indirect
•
•
Traditional travel agents
On-line travel agents
o Travelocity, Expedia, Priceline.com, last minute.com, …
o On-line travel portals
- Orbitz in the US, Opodo in Europe, Zuji in Asia
•
Tour operators and consolidators
Airline Distribution Channels
Supplier
call centres
& ticket office
Supplier web site
Corporate travel
management
Suppliers
GDSs
Traditional
travel agencies &
their web sites
Tour operators &
consolidators
Internet travel
agencies &
airline portals
Customers
Travel Agents’ Traditional
Services
•
•
•
•
•
•
•
•
•
•
Marketing and sales
Advisory service and itinerary planning
Pricing and booking
Subsequent amendments (back to advisory)
Ticket issues
Itinerary
Invoice
Delivery of documents (e-ticket or not)
Accounting and credit
Refund/Changes (back to advisory))
10% of total business is refunds and changes
Travel Agents’ other
services
•
•
•
•
•
Hotels booking
Car hire
Package holidays
Foreign currency
Travel Insurance
Travel Agent Remuneration
models - Original Model
• Commission
a simple % of airline fare
• Override payment
additional commission for achieving targeted business levels
• Net fares
discounted fare offered to agent which could be sold to
customers at what ever level the agent can achieve
Airline Distribution Costs by Sales
Channel:
$300 Ticket (all channels)
45.00
Agent commission
40.00
CRS booking fee
35.00
Credit card fee
Ticket processing
USDollars
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Traditional Agent
Internet Agent
Source: JP Morgan, 1999
Airline Call
Airline Internet
Travel Agent
Remuneration models
• Commission
a simple% of airline fare
• Override payment
additional commission for achieving targeted business levels
• Net fares
discounted fare offered to agent which could be sold to
customers at what ever level the agent can achieve
• Flat fees
a pre-determined amount for booking a ticket
• Service fee
fee paid by customers for booking itineraries
• Management fee
fee paid by corporate customers for managing their travel
policy, all the commission from airlines passed on to the
customers
• Transaction based fees
similar to management fee but is based on each transaction
undertaken
Original
model
Customer pays agent
Agent pays the airline
(less commission)
Airline pay agent
override
Agents returns the
override to customer
1st Phase
Airlines attack
2nd Phase
TMCs
becomes
traveller’s
agent
BA’s Channel Shift
100%
% of Bookings
80%
60%
40%
20%
0%
2003/2004
Ba.com
2004/2005
2005/2006
Call Centers
Online agents
2006/2007
Traditional agents
Channel shift
Share of revenue
Index = 100
11%
Online agents
0%
58%
76%
Travel agents
Online direct
Airline.com
/ Direct links
3%
21%
2003
Call Centre
2004
Source: Harrop, IG Management, 2006
2005
14%
17%
2006
Airline relationships
with TMCs
Source: Alamdari and Mason, 2004
Strategic distribution issues for airlines
Source: Alamdari and Mason, 2004
Changing Role of the TMC
PAST
PRESENT
FUTURE
•Low Commissions
•High on-line adoption
•Transaction Fees
•Procurement focus
•On-line sales channel
•Travel Manager
•Solution provider
•Procurement
•Local service
•Multiple GDS
•Centralised multimarket servicing
•Multi-market servicing
•Value add proposition
•Direct airlines sales
•Regulatory impact
changing
•Commissions
•Agent/Principal
•Standard GDS
•High regulatory
impact
•Regulatory impact on
decline
HIGH
TRANSACTION VALUE – Commissions
LOW
LOW
ADDED VALUE – income from customers
HIGH
Source: Harrop, IG Management, 2006
The Future is Channel Fragmentation
3rd Party
Channels
Company
Traveller
Travel Agent /
Consolidator
On-line portal
or off-line
Suppliers
Channels
GDS
50%
Private Fares
0.5%
GNE
10%
Web search
Consolidated MI
10%
Supplier Direct
Private Fares 0.5%
Company
Supplier Direct
On-line or off-line
Traveller
Supplier Portal
10%
Supplier Website
10%
Source: Harrop, IG Management, 2006
Distribution alternatives lead to confusion
• Direct Connects
•
•
•
Single inventory and single supplier
No shopping alternative other than via the GDS
No data integration other than via the GDS
• OnlineTravel Agents and MetaSearch Engines
•
•
Expedia, Priceline, Travelocity, and Orbitz all use a GDS for functionality, faring
and pricing, and data integration
SideStep, Kayak, Mobissimo use ‘screen scrape’ technology for web fare
comparisons
• “Global New Entrants” - G2 Switchworks and ITA Software
•
•
•
•
•
•
Utilises Worldspan for functionality, faring and pricing, and data integration
Limited airline content access and no hotel or car access
Conceptual platforms that claims equal functionality w/o a GDS
Developing solutions with limited testing and unknown scalability
Initial launch provides only access to air and only 8 carriers vs. 400+ in GDS
Claim inventory aggregation and Super PNR data integration
Source: Harrop, IG Management, 2006
Distribution strategies
by segment
Increasing value
Decreasing cost
Leisure
segment
Youth/
student
Seniors
Leisure
pleasure
Corporate
segment
Business
pleasure
Small and
Large
medium
corporate
enterprises
Traditional
offline travel
agent
Segment
of one
Main
focus
Important
focus
Online
travel agent
Limited
focus
Call Centrer
Airline direct
.com
Source: Harrop, IG Management, 2006
TMC strategic issues
TMC strategic issues
Ensuring access to full content
Communicating value proposition to
consumers
Global functionality
Global fulfilment
IT investment
Threat of merger or acquisition
1.00
1.50
2.00
2.50
3.00
Very unlikely
3.50
4.00
4.50
5.00
Very likely
Source: Alamdari and Mason, 2004
GDS market structure
USA / Canada
Central /
South America
Europe /
Middle East
Asia / Pacific
Amadeus
9%
38 %
49 %
15 %
26 %
Galileo
21 %
6%
31 %
15 %
22 %
Sabre
42 %
50 %
13 %
4%
24 %
Worldspan
28 %
6%
8%
4%
14 %
Abacus
19 %
4%
Topas
4%
1%
Infini
4%
1%
TravelSky
36 %
8%
Source: Star Alliance, 2005
NB: Travelport which own Galileo
purchased Worldspan in August
2007
Global
Average
GDSs’ Perspectives
• Types of transactions flowing through the systems are getting
more and more complex
• The average number of transactions per booking has increased
by 60% as there are more lookers than bookers
• Prepared to reduce fees in exchange for having access to
airlines’ all content
• Are not prepared to remunerate travel agents the same as
before and expect travel agents to bear some of the costs of a
GDS booking
GDS strategic issues
Strategic issues for GDSs
Ensuring access to content
Realignment and change of the
business model
Developing new pricing mechanisms
for airlines
Take advantage of opportunities
provided by deregulation
Provide booking tools for corporates
Protect business from TMC moving
towards our business area
Protect our company from takeover by
other GDS
1.00
1.50
2.00
2.50
Very unlikely
Source: Alamdari and Mason, 2004
3.00
3.50
4.00
4.50
5.00
Very likely
GDS’ view of airline
strategies
GDS view of airlines' strategy
Put further pressure on GDSs to
reduce fees
Pass GDS fees onto corporates
Pay GDS for favourable display
Continue displaying information on all
GDSs
By-pass GDS as much as possible
Work only with preferred GDS
1.00
Very unlikely
1.50
2.00
2.50
3.00
Source: Alamdari and Mason, 2004
3.50
4.00
4.50
5.00
Very likely
GDS fee structure
development
GDS fee structure development
Variable pricing will become the norm
Pricing based on airline market share in each market
Channel access based pricing
Source: Alamdari and Mason, 2004
Score
4.88
4.13
3.88
GDS New Fee
Structures
• In US GDSs were deregulated in 2003
• DCA3 (Direct connect access for 3yrs) agreements
expired 2006
• Sabre, Travelport and Amadeus have new full content
agreements with all of the US majors.
• Agents can “opt in” to work with airline’s preferred GDS
• Agents get access to content and avoids $3.50 per segment fees
• But pay GDS $0.80 per segment (EAS - Efficient Access Solution)
– For large TMCs this is taken from the incentive fee the GDS pays have
traditionally paid the TMC.
• Agents can “opt out” and not use airline’s preferred GDS
• pay the airline a $3.50 per segment surcharge for any bookings
• TMCs still need access to full content so will pass on
any additional costs to travellers in service charges
Strategic issues for
corporates
Strategic issues for corporates
Complete access to inventories
Ensuring accurate MIS
Improve data management
Better use of technology to reduce
costs
Policy compliance
Internal communication with travellers
Improve business travel management
processes
Develop use of self service reservation
systems
Globalisation of air deals
Integrating direct purchases within the
travel programme
Global fulfilm ent
1.00
1.50
2.00
2.50
3.00
Very unlikely
3.50
4.00
4.50
5.00
Very likely
Source: Alamdari and Mason, 2004
Control of Spend by
Travel Managers
• Travel manager needs to control / manage bookings
to try to optimise the spend
• Travellers have more knowledge of prices as they
scan the internet
• Travel managers discourage travellers booking online
Control of travel spend would be ceded to travellers
Travel managers believe that travellers booking online hinder their
role of minimising travel spend for the company
• Also a waste of executive’s time
Online usage by
business travellers
Channel used for last flight taken
35%
30%
25%
20%
15%
10%
5%
0%
Company's Self
Booking Tool
Direct via an airline's
website
Telephone TMC
Source: Mason, Cranfield University, 2006
Via Travel
manager/travel
arranger
Emailing a request to
TMC
Via Secretary/PA
Via an online travel
agency
Direct channels
dominates hotels
Hotel booking channels
35%
30%
25%
20%
15%
10%
5%
0%
Hotel's website
Self Booking Tool
Source: Mason, Cranfield University, 2006
Travel Agency
Admin/PA Does it for
me
Call direct to the
Hotel's reservations
department
Direct dominates Car
Rentals
Car Rental booking channels
40%
35%
30%
25%
20%
15%
10%
5%
0%
Car Rental Website Self Booking Tool
Source: Mason, Cranfield University, 2006
Via Travel
Management
Company
Call direct to car
rental company
Admininstrator/PA
does it for me
Other
Direct booking may
create difficulties
• When a traveller books direct…
• Loses TMC support on that booking
• Change tickets
•
•
•
•
Loses Management Information
Loses leverage against suppliers
May lose volume deals
Travel manager can’t trace traveller if transport crashes/terrorist
attack/act of god
• Harder to reconcile expenses
Companies using Self
Booking
Tools
Survey of 424
large corporates
Source: Mason, Cranfield University, 2006
SBT booking
penetration
Source: Mason, Cranfield University, 2006
SBT saves TMC costs
Source: Mason, Cranfield University, 2006
SBTs reduce ticket
prices
Source: Mason, Cranfield University, 2006
SBT adoption by
Industry
Source: Mason, Cranfield University, 2006
Three different groups
of SBT users
Source: Mason, Cranfield University, 2006
Making SBT mandatory
improves adoption
Source: Mason, Cranfield University, 2006
Future of Airline
Distribution - 1
• The drive to reduce distribution costs through increasing
on-line sales, e-ticketing, self servicing, reducing travel
agents commission and battle against GDSs will be an
ongoing strategy.
• As US and European airlines have benefited from the
savings of distribution costs, carriers from other regions
will speed up their move towards distribution revolution to
have a similar cost base for competition
• Airline alliances may push for common reservation
booking platform
• Internet will continue to revolutionise travel distribution
Future of Airline Distribution - 2
• Travel agents will see their shares of airline ticket sales gradually
deteriorating as a result of the emergence of alternative channels
• Small agents could become under threat due to: less leverage to get
good airline deals, the development of IT is too costly, they cannot
influence corporate choice
• The market will experience a growing dominance by a handful of large
agents (traditional and on-line)
• traditional agency skills with face-to-face contacts have to be
complemented by offering specialist services and capabilities to
consumers through the internet